Guide to Credit Cards: Never Pay Credit Card Fees Again!
We've seen that the best way to avoid borrowing money at excessive interest rates on your credit card is to pay off your balance in full and in time every month. That will also save you from the fees that credit card customers most commonly get hit with: late payment fees.
Many credit card holders underestimate the cost of making late payments. Credit card companies use late payments - often even a single day late - as an opportunity to hit customers with a slew of profit-generating fees and charges. They can include:
- The late payment fee itself, often about $30.
- Retroactive elimination of your "grace period", meaning that you will be charged interest on your entire balance from the time of each purchase until the time your check finally reaches the credit card company.
- Loss of rewards, if the credit card offered rewards.
- Increase in the interest rate charged on your outstanding balance. One Providian credit card, for example, raises the interest rate on outstanding balances by up to 26 percentage points (!) if the card holder fails to make the minimum payment by the due date.
- Negative impact on your credit rating, raising the cost of future loans such as mortgages.
Since the cost of late payments is so steep, it's particularly important to ensure that you never miss the monthly payment deadlline on your credit cards. How can you ensure that you pay off your balance in full and in time every month? Here's how:
Arrange to have your full credit card balance direct debited to (ie. automatically withdrawn from) your checking account each month. You do this by requesting a direct debit form from your credit card company. You fill out the form with your bank account details, often attach a cancelled check, and sign instructions to the credit card company to withdraw your entire outstanding balance each month from your bank account. This is by far the best way. Almost all credit card companies offer this as a free option, though they don't publicise it. There are 3 advantages to doing this:
- You don't have to do anything once the direct debit is in place. Direct debits save you the time and effort of online bill pay, and the time and expense of writing and posting checks.
- You'll never forget to pay your credit card bill on time again. If the credit card company fails to direct debit you in time, that's their problem.
- You'll be billed at, or close to, the payment due date. That means that you will pay your bill at the last possible moment to avoid incurring any charges. If you have a checking account that pays interest (for example E*Trade's Complete Checking Account, which has no fees, pays interest and refunds all ATM fees), you'll earn interest on the cash until your checking account is debited.
Should you worry about the loss of control of having your credit card bill direct debited to your bank account? What if there are spurious charges on your credit card bill? This shouldn't be a concern. You'll receive your credit card bill at the usual time each month, and your bank account will be direct debited at or immediately before the payment due date. That should give you between 20 and 35 days to spot any errors on your credit card statement and to call the card company to challenge the bill. And removing the stress and burden of physically having to pay the bill might allow you to check the bill more carefully.
One point to watch out for. Many credit card companies will encourage you to get your minimum due payment direct debited to your account, instead of your full balance. That's fatal. It means you'll be automatically borrowing on your credit card every month. It's another way credit card companies try to get you to borrow money from them.
If you can't set up a direct debit, use online bill pay to schedule the payment of your full balance before the due date. If you can't get your full balance direct debited to your checking account, then as soon as you receive your credit card bill each month schedule the payment of your full outstanding balance in time for the due date. Online banking and bill pay makes this easy.
Failing that, send a check for your full balance as soon as you recieve your bill. This is our least favorite approach. It ensures that you'll get your full payment to the credit card company in time, but it costs you in time and postage and you'll loose the interest you could be earning if you left the cash in your account until the payment due date.
We've taken care of late payment fees, but what about other fees? Since you won't be borrowing money ever again on your credit cards, you won't incurr balance transfer fees. And if you're worried that you'll be charged a penalty fee for exceeding your credit limit, call your credit card company and tell them to disallow any charges that take you over the limit. And ensure they don't bill you a penalty fee for doing so. If they won't comply, dump the card in favor of one that will.
Comments
I disagree with having your full outstanding balance taken from your checking account each month on the due date of your credit card. I only have the latest statement balance removed from my checking account on the due date. That way I have untill the next statement due date to pay the charges that came in afer the latest statement was cut. I could have a $500 outstanding balance and only a $400 statement balance. Keep using the precious grace periods. Colin Horvath